On January 1st, Chinese private equity firm DCP Capital agreed to acquire a 78.7% stake in Sun Art Retail Group, one of China’s largest hypermarket chains, from Alibaba Group for $1.58 billion. Deutsche Bank acted as the financial advisor for the transaction.
Sun Art operates an extensive network of stores under the “RT-Mart” and “Auchan” brands, catering to the needs of China’s growing middle class with a diverse range of products, from groceries to household goods. The company gained prominence after Alibaba first invested in 2017, combining its digital capabilities with Sun Art’s brick-and-mortar expertise. Alibaba later acquired a controlling stake in Sun Art in 2020 for $3.6 billion, solidifying the company’s market position in the hypermarket sector.
DCP Capital, the acquirer, is a well-regarded private equity firm with expertise in transforming businesses across sectors like consumer goods, retail, and manufacturing. With this acquisition, DCP Capital secures a controlling stake in one of China’s largest retail chains, presenting an opportunity to drive further growth and innovation in the rapidly evolving retail landscape.
In terms of the deal rationale, for Alibaba, the divestment aligns with its broader strategy to streamline its business portfolio and focus on its core operations, such as e-commerce, while accelerating its exit from physical retail. This ongoing initiative, led by former CEO Daniel Zhang, involves selling non-essential holdings to raise capital for strategic investments in high-priority areas like AI and cloud computing. Alibaba has demonstrated a strong commitment to this approach, even accepting significant losses on past investments. A notable example is the sale of its department store chain Intime, which resulted in a $1.3 billion loss.
For DCP Capital, acquiring Sun Art aligns with its strategy of investing in high-potential consumer businesses in China. By leveraging its operational expertise and industry insights, DCP aims to strengthen Sun Art’s competitive position within the retail industry, which is undergoing significant transformation fuelled by digitalisation and changing consumer behaviours. The deal also comes after Sun Art’s stock surged by 85% in 2023, far outperforming the Hang Seng Index’s 20% rise.
The acquisition involves DCP Capital purchasing 7.51 billion shares, translating to a price of HK$1.55 per share. The transaction structure includes a deferred payment arrangement, with the final price contingent on Sun Art’s Adjusted EBITDA in 2028. If performance targets are met, the sellers, including Alibaba, stand to receive up to HK$13.14 billion in total. The sale was at a discount, falling short of Sun Art’s 2024 market value, with a 0.6x price-to-net asset valuation. This is well below previous transactions such as JD.com’s 3.5x multiple in the sale of Yonghui Superstores last year. Subsequently, the retailer’s shares sank by as much as 35% in early trading while Alibaba’s shares fell by 1%, reflecting negative investor sentiment regarding the deal.
This acquisition highlights broader trends in China’s private equity market, where rising incomes and shifting consumption patterns make the retail sector a prime investment opportunity. While DCP Capital seeks to unlock Sun Art’s potential, Alibaba’s decision to divest at a loss raises questions about the long-term outcomes of its portfolio restructuring strategy. Time will tell if DCP can capitalise on Sun Art’s market position and whether Alibaba’s strategic pivot will yield the desired results.
Written by: Akhil Raghavan
Sources: MergerLinks, Press Releases, Yahoo Finance, Reuters
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